With the State Pension currently amounting to £8,767 per year, it is unlikely to provide the financial freedom in retirement that most people are seeking. Therefore, investing in the FTSE 100 could prove to be a good idea, since it may be able to provide a sizeable nest egg for retirement. From that, an income may be drawn that provides an improved level of comfort in older age.
Here’s why now could be a good time to start investing in the FTSE 100. It could offer good value for money even after its decade-long bull run.
Doubling the State Pension
While doubling the State Pension in retirement may sound like a major task, it may not prove to be as challenging in practice. Investing even modest amounts often in a variety of FTSE 100 companies could lead to a significant retirement portfolio in the long run.
For example, investing £100 per month over the course of 40 years could lead to a nest egg of £240,000 by retirement. This assumes an annualised total return of 7% per annum, which is what could realistically be expected from the FTSE 100 over the long run.
The £240,000 nest egg may then provide an annual income of £9,600 per year, assuming 4% is withdrawn from the portfolio each year. This is the same amount as the FTSE 100’s current dividend, which may mean that there is still scope for capital growth in retirement.
Investing today, for tomorrow
While investing in the FTSE 100 can offer improved retirement prospects, many individuals may be of the view that at 7,400 points, it is overvalued. After all, it has only ever traded around 5% higher than this at its record level. Added to this is the fact that the index has enjoyed a decade-long bull market.
However, the index seems to offer good value for money at the present time. For example, its dividend yield of 4% is towards the upper end of its historical range. There are also a number of large-cap shares that have improving growth prospects and yet trade on low valuations. They may offer wide margins of safety.
Furthermore, comparing the FTSE 100’s current price level to historic levels may not be an accurate guide when it comes to judging whether it is set to rise or fall. Earnings growth over recent years means that the index could warrant a higher price level, while its low starting point following the financial crisis could mean that it has further upside even after doubling in the last 10 years.
As such, investing in a diverse range of FTSE 100 shares today could be a shrewd move. They may provide an investor with the opportunity to enjoy a greater sense of financial freedom in retirement. Achieving that goal with relatively modest amounts of capital could be a realistic target for a wide range of investors.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.